Speculating on Sequenom

Cramer’s found a medial-diagnostics company with the potential for enormous returns, he said Friday, giving investors just what they want from a speculation stock.

Sequenom isn’t profitable yet, but if and when its stable of prenatal genetic-testing products hits the market, Cramer thinks the upside could be tremendous.

This company is developing a noninvasive test for chromosomal abnormalities like Down syndrome and other genetic disorders. Right now, such testing is done through amniocentesis and chorionic villus sampling, both of which require sticking a needle into the womb. This could put the mother at risk of miscarriage. But Sequenom’s test, SEQureDx, merely captures cells that are eliminated in the mother's blood during gestation.

Speculating SQNM

Mad Money host Jim Cramer shares his outlook on SQNM.

A recent study showed that SEQureDx showed no false positives and a 99.1% detection rate for Down syndrome, which is only 0.6% behind that of amniocentesis. And again, there’s no risk to the baby with SEQureDx.

This Down test will be Sequenom’s first chance to sell its technology, and there’s a huge market waiting for this product.

The American College of Obstetricians and Gynecologists in January 2007 recommended that all mothers be tested for Down, and SEQureDx could win out as the medical community’s favored method, not only for its safer results but also because it can be used as early as the first trimester. Sequenom predicts sales could reach $1.2 billion in the U.S. and $3 billion to $5 billion worldwide. If the company adds more prenatal-testing options, such as determining a baby’s gender, revenues from that could reach $450 million in the U.S. alone.

Best of all, Sequenom doesn’t need Food and Drug Administration approval to move forward. SEQureDx has been developed as a laboratory development test, or “home brew” test, and under government regulation these tests aren't subject to pre-market review by the FDA.

And there’s a catalyst here: Sequenom will release more study data on Jan. 31 at the Society for Maternal Medicine Meeting in San Diego. If those numbers are as good as SEQureDx’s study, the stock could really move, Cramer said.

The red flag to watch for is 2008 cash expenditures. Sequenom reports its fourth quarter in February, and if the company burned through more than $36 million, Cramer recommended you consider taking a pass on this stock.

The last potential driver for this stock is a takeover, and Cramer said that’s a definite possibility. If Sequenom fetches the same valuation that Third Wave did from Hologic, which wanted Third Wave’s human-papillomavirus-virus test, then this $20 stock would jump to $27, a 33% premium.

There’s no rush to rush in SQNM, though, so investors can take their time and do the requisite homework. There’s just more than a month before that new batch of study data comes out. That’s plenty of time to build a position.